Guide to Investing in Your 20s

You have finally graduated college and, after finally finding a full-time job, can start paying back those student loans. Retirement seems like it is in the distant future and you are more concerned with living paycheck to paycheck. But it is never too early to start preparing for your future by establishing sound financial footing and taking early investment steps.

Save money
The first step to investing is to align your spending habits with your investment plans by carving out a chunk of every paycheck for savings. While you might not feel that you have the current flexibility to put away any money, the earlier you make saving an uncompromisable habit, the easier it will be to increase your investments long-term.

According to Charles Schwab Foundation president Carrie Schwab-Pomerantz in an interview with Forbes, people in their 20s should be budgeting for and saving at least 10 percent of their annual income. While this may seem excessive, the more you have saved early on, the more it will compound over the next 50 years. Not to mention, it is a solid step to increasing your savings rate to 20 percent in your 30s.

Pay off your debts
Get out from underneath the oppressive thumb of student loan and credit card debt as quickly as possible by establishing an aggressive debt repayment plan. According to Stacy Rapacon of Kiplinger, the longer you let debt linger, the further it will set your finances back in the form of greater interest payments and lower credit scores. The sooner you repay your debts and free yourself from crippling interest payments, the more money you’ll have to invest in your future.

Fund your retirement
It is never too early to start setting aside money in your retirement fund, especially since the years will only compound how much you will have in your account by the time you retire. Rapacon of Kiplinger calculates that if you invest $100 a month as a 25-year-old, assuming an 8 percent return and quarterly compounding, you’ll have around $346,000 by the time you turn 65.

Investing money in a retirement fund now is even more essential because of your employer’s matching program. Arielle O’Shea of NerdWallet highly suggests taking advantage of your employer’s generosity by contributing to any available retirement plan, such as a 401k, especially if your employer offers a matching percentage.

If you don’t have access to a company-based 401k, Forbes’ Samantha Sharf recommends investigating the option of starting a Roth IRA or Roth 401k that taxes your contributions now but lets those contributions grow tax-free for the rest of your lifetime.

Take risks
Those who do invest in their 20s often do so conservatively because they don’t want to see any of their hard-earned money lost, but that also limits the potential for their investments to grow. According to O’Shea, “Many millennial investors make the mistake of avoiding risk even though it helps them over a long timeframe.” Thus, to reach your target retirement financial goals, it is important to allocate much of your portfolio to stocks over bonds. While there may be more short-term drops, Vanguard analyses show that it is the way to get a better lifelong annual return.

Get advice
If you are not sure what the best investment options are for you, or would like additional clarification on what investing involves, it never hurts to ask for advice from an advisor who can help you map out a financial plan that spans. O’Shea of Nerdwallet recommends even opening an account with a robo-advisor that will give you basic insights into your current plan and offer advice on the next steps.

Your gut feeling may be to wait to invest and spend your money elsewhere while you are young, but the more aggressively you save and invest your income now, the better prepared you will be for retirement.

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